With residential property prices escalating at an unprecedented rate, many investors looking to enter the property market are finding it increasingly difficult to get a foot on the first rung of the property ladder.

As an alternative option, more and more investors are investigating the merits of commercial property to help them grow their wealth. But what are the major differences between commercial and residential property investments? What do investors need to look out for?

Capital growth potential

Capital growth potential is an important consideration for investors, and this is one of the key differences between residential and commercial property. It is generally believed that the capital growth potential of commercial property is not as reliable as with residential property. This is because demand for residential property is growing all the time as the population grows, usually at a higher rate than the supply of new homes.

Generally speaking, demand for commercial property tends to be less and it is usually reliant on economic growth, rather than population growth. When the economy is in a growth phase, more new businesses start up and this increases demand for commercial premises and supports capital growth, but this generally occurs at a much slower rate than with residential property. Additionally, commercial property is more vulnerable during an economic downturn than residential property.

Rental yields

Whilst residential property may win on capital growth potential, commercial property may often be the stronger contender when it comes to rental yields.

For example, rental yields from residential property are generally around 3 – 5% per annum, which is much lower than with commercial property, which can often return as much as 5 – 12% per annum depending on your choice of investment.

An additional benefit of commercial property is that rental increases can often be written into the lease and may even be tied to economic factors. This makes it much easier to plan / anticipate the rental returns you will receive on your investment.

Tenant availability and security

Whilst rental yields may be higher for commercial property than with residential property, finding tenants may not be as easy. Commercial properties can often sit vacant for months or even years, particularly when the reason for the vacancy is an economic downturn or a long-term tenant has gone out of business. Finding new tenants may often require remodelling or refitting the premises, which can also pose an additional expense.

However, once you have found a good tenant for your commercial property, they do tend to stay longer and are less likely to default on the rent payments than residential tenants. Residential leases can be as short as three months, where commercial property leases tend to be at least 3 – 5 years or even longer.

Deposits

Commercial property investment entry price points may be extremely attractive to the smaller investor, however there are some disadvantages when it comes to putting down a deposit. Lenders are often much more reluctant to approve loans for commercial property investments and usually require a deposit of at least 30%. For a residential property investment, you can often get loan approval with a deposit as low as 5%.

Maintenance and other property expenses

This is another area where commercial property investment can often win over residential property investment. With a residential property, the investor is responsible for all maintenance costs and expenses such as repairs and operating expenses like the council rates.

With a commercial property investment, the tenant is usually responsible for all expenses including general maintenance, repairs and operating expenses such as rates.

A balanced investment portfolio is best

When it comes to deciding whether you should invest in residential or commercial property, we recommend that you look at each investment opportunity on its individual merits and do extensive research to determine both its capital growth and rental yield potential.

A balanced portfolio would most likely include a combination of both residential and commercial properties that have been specifically chosen to meet your personal investment criteria. A balanced approach will also assist in mitigating any risks associated with your investment over time.

If you’re considering a residential or commercial property investment, then don’t hesitate to give us a call. We’ll help you crunch the numbers to determine if the property you are considering will help you meet your investment objectives. We can also help you to get pre-approval on your loan so you can easily determine which properties meet your buying criteria.

Rentvesting. It’s a whole new word in today’s popular culture, but it also represents a revolution in home buying strategy, particularly for first home buyers and those struggling to move up the property ladder. But what is it? And what are the benefits?

What is ‘rentvesting’?

Everyone agrees that buying your first home is becoming increasingly difficult. The struggle to save up a deposit for your first property purchase is getting harder every year, with home values increasing by as much as 13% or more per year in major markets such as Melbourne and Sydney. The reality is that the longer you wait to buy a property, the more difficult it may become to save a deposit or borrow enough money to be able to afford to buy it.

For many people, being able to afford to buy a home in a location where they actually want to live is making the challenge more difficult still. With the most affordable homes often located in new suburbs or outer suburbs, finding a place you can afford to buy near to your place of work, family or required lifestyle amenities can be completely out of the question.

‘Rentvesting’ is a new buying strategy that’s recently emerged in response to these issues. It entails purchasing your first property as an investment rather than a place to live. Rentvestors typically purchase a property that meets their budget in a location they can afford, then rent a home in a location where they would prefer to live and work. It is frequently more affordable to rent a home in a popular location than it is to buy it, and this basic financial fundamental is what’s behind the rentvesting revolution.

Technically, you don’t actually have to be renting somewhere to be a ‘rentvestor’. The term also applies to many Gen Y first home buyers. This class of ‘rentvestor’ is typically living at home with mum and dad to reduce their living expenses whilst they save up a deposit for a property purchase. These savvy property buyers may continue to live at home with mum and dad even after they’ve purchased their first property, and perhaps even after they’ve purchased their second.

What are the benefits of ‘rentvesting’?

The primary benefit of the rentvesting strategy is that it allows you to get into the property market sooner. As every successful property investor will tell you, the sooner you get into the market, the sooner your property can start generating capital gains and the sooner you can start to build wealth.

The beauty of this strategy is that in a rising market, you may soon have equity you can use to purchase a second property that’s also in an affordable location. Again it probably won’t be a property you want to live in, but you’ll have two properties gaining equity as home values rise (potentially), two sets of tenants paying down your mortgages for you, and greater tax advantages as well.

Research is the key to a successful rentvesting strategy

Buying an investment property first means that you won’t have to compromise on the location when you make your purchase. This can also mean you can make investments that may return you the greatest capital gains. You can literally restrict your property searches to properties that meet your buying criteria of price, affordability and capital growth potential – a luxury that most owner-occupier first home buyers simply don’t have.

Careful and thorough research is the key to success with a rentvesting strategy. The property needs to deliver a very consistent income and at the same time, achieve steady capital growth. To succeed, you first need to identify a location that provides capital growth potential, then carefully consider the housing stock available within that location and choose one that will best meet your needs.

Call us to get started

As your professional mortgage broker, we’re here to help you assess your financial position and work out what you can afford to invest. We can also help you with up-to-the-minute property market data that could give you the edge when selecting the right property for your means.

For more information about rentvesting, or for an informal chat about your plans with no obligation, please give us a call today. We’ll be happy to help you start rentvesting if it’s the right solution for you.

12 Jul 2016

With Britain’s vote to exit the EU and all the uncertainty that surrounded our own Federal Election this month, there’s a lot of volatility in our financial markets and our property markets have slowed.

As predicted by most market forecasters, the Reserve Bank of Australia (RBA) decided to keep the official cash rate on hold at 1.75% once again at its July meeting. The RBA has indicated that it’s waiting for more information before deciding if further cuts to the cash rate will be necessary.

However, an Aussie dollar that’s strengthening against other currencies in light of global market volatility, combined with a lower than expected national inflation rate would seem to suggest that further rate cuts may be on the horizon. Whilst some analysts are speculating the cash rate could go as low as 1%, others believe a rate cut in August to 1.5% could see the end of the RBA’s easing bias in 2016.

It is usual for property markets to slow somewhat at this time of year, and the Federal Election also caused a reduction in the number of auctions held at the start of this month. For the week ending Sunday 03 July, there were only 850 auctions scheduled nationally, which is a significant drop since the same time last month when there were 1960 scheduled auctions.

Auction clearance rates also registered a significant drop in most markets. Queensland held 68 scheduled auctions with a very low clearance rate of just 36%. Western Australia held 30 scheduled auctions with a clearance rate of 38%, ACT held only 27 scheduled auctions with a clearance rate of 54%. NT was also low in activity, with just 9 scheduled auctions and a clearance rate of 22%.

The larger markets performed a little better however. Victoria had 270 auctions with a clearance rate of 67%, NSW had 365 scheduled auctions with a clearance rate of 78% and South Australia had 70 scheduled auctions with a clearance rate of 62%.

During June, average home values didn’t show much movement at all. Sydney’s home values increased by just 1.15% and Hobart’s home values increased by 1.81%. Melbourne showed a marginal rise in home values of just 0.77%, Brisbane/Gold Coast also had a marginal increase of 0.11%. All other markets showed marginal declines, with Darwin showing the most significant decrease in home values at -1.55%, Adelaide following with a decrease of -1.27%, Canberra next with a decrease of -1.11%, Perth showing a decrease of -0.79% and Brisbane showing a home value decrease of -0.11%.

Following the RBA’s decision to cut the cash rate in May, lenders have improved their interest rates for owner-occupier, property investment and commercial property buyers. Interest rates are very competitive and with the property market finally showing signs of slowing down for winter, lenders are offering some great deals to stimulate more business – so please call us today.

Matt has recently joined Element Finance Joondalup bringing with him 9 years of experience garnered from two large banks and a small Perth broker. More recently, Matt has built several houses and knows first hand the hurdles a home buyer or investor can experience, and he has the ability to break down this process into simple concepts that make the whole process easy to understand.

After migrating here from England with his parents back in 1993, Matt has adapted to the Australian way of life and enjoys finance, property and investment. It was during his time at The Banks he realised he enjoyed discussing property and creating relationships to deliver a product for the Client that they both understand and meets their needs.

We are really excited Matt has chosen to join us. If you or any of your friends or family would like to chat with Matt to see how he can help improve your situation, you can contact him directly on matt@elementfinance.com.au or 0401 089 524

Getting your budget under control and your finances in order is absolutely essential to anyone looking to apply for a home loan, but it’s particularly important for first home buyers about to take the first step on the property ladder. Now the end of financial year has arrived and you’re getting all your paperwork together for your tax return, why not take stock of your financial situation and plan your budget for the year ahead at the same time? Here’s a few things to consider if you’re looking to get financially fit for a home loan application in the new financial year.

Reassess your budget and get serious about your savings.

When you apply for a home loan, particularly as a first home buyer, it is important to have a thorough understanding of your financial situation and good savings habits. Lenders will want to see an established history of regular savings before they will give you their best rate on a home loan and for this reason, you should take a realistic look at your spending habits and create yourself a budget to ensure your savings will grow at a steady rate.

Work out how much deposit you’ll need and set yourself a savings target.

If you set yourself a savings target, you may find it will be much easier to stick to your budget. To set your target, first you’ll need to work out how much you need for your deposit. The amount of deposit you will need will depend on the cost of the property you want to buy, but if you have an idea of the kind of property you want to purchase you’ll be able to set a goal. It’s recommended that you have a deposit of at least 5% of the purchase price, however if you can possibly save 20% of the purchase price you’ll avoid paying Lenders Mortgage Insurance.

Make an accurate assessment of any debts and ongoing expenses.

Lenders assess your creditworthiness on the amount of money you already owe, your ability to repay your debts and your capacity to take on more debt. Paying down any credit card debts or personal loans prior to applying for your home loan will improve your borrowing capacity and give you the best chance of loan approval when you apply.

Even if you don’t have any debt on your credit cards, lenders take into consideration the credit limit on your credit cards and count this as potential debt. So if you have several credit cards, it may be a good idea to cancel some of them now if you are planning on applying for a home loan in the next financial year.

If you have a lot of debts, think about consolidating them.

If you take stock of your debts and realise you won’t be able to pay them all off anytime soon, it’s a good idea to look at ways to reduce your interest liability. Credit cards, store cards, short-term personal loans and cash advances all carry high interest rates and this can make them quite difficult to pay down. Getting your finances in order may mean it’s time to consolidate your debts.

Consolidating your debts means rolling all your debts into one, usually using a loan that has a lower interest rate. If you have quite a few expensive debts it may be possible to roll these into your home loan if you have one, or perhaps a personal loan that carries a lower interest rate overall. This may save you a great deal of money on interest payments, which is money you could use to pay off your debts faster. It could also allow you to spread your repayments over time, making them more affordable. If you want to be eligible to apply for a home loan in the next financial year, consolidating your debts sooner rather than later may be a good idea.

The end of financial year is a great time to get your finances in order and you never know, you may get a tax refund that could really give a boost to your savings efforts for a deposit for your home! Remember, we’re here to help you get your finances under control so you can save your deposit and get into your new home sooner. If you’re planning on applying for a home loan in the next financial year, don’t hesitate to give us a call today.